By Mats Kallmyr | Ever to Excel

Good startups are no longer found only around the corner. As a business angel and advisor I see founders in Sweden, Australia and Asia who would be worth backing if the distance did not get in the way. Distance, however, brings questions that a domestic deal never raises. This guide covers what research tells us about angel investing, and the cross-border questions worth answering before anyone signs.

Note: this is general information from an advisor’s perspective, not personal financial, legal or tax advice. Ever to Excel is about business angel and advisory work, not about managing other people’s money.

Start with what the research says about angel returns

The largest study of angel investors in groups was published by the Kauffman Foundation. Wiltbank and Boeker (2007) analysed 1,137 exits and closures reported by 539 angels in 86 North American angel groups. Their average result was about 2.6 times the invested capital after roughly 3.5 years. But the spread was wide: about a third of the exits lost the whole investment, and returns were heavily skewed, with many losses and a few very large wins. Almost half of the companies had no revenue when the angel first invested.

Two lessons stand out. Angels who spent more time on due diligence, stayed involved after investing and knew the industry did better (Wiltbank and Boeker, 2007). And because outcomes are so uneven, one deal proves nothing. A portfolio does the work. Cross-border investing adds extra risk on top of this, which is why discipline matters even more.

Five questions to answer before investing across a border

1. Which law applies, and what rights do I really get? Company forms, shareholder protection and the way agreements are enforced differ between countries. Ask a lawyer who knows both the investor’s and the company’s jurisdiction.
2. How will the investment be taxed? Rules in your home country and in the company’s country both matter, including any tax treaty and possible investor incentives. Get tax advice before the money moves, not afterwards.
3. What happens if the currency moves? A company can grow strongly in local currency and still give a weak result when converted back. Decide up front whether to accept this as part of the risk and size the position accordingly.
4. Do I understand the people and the market? Remote due diligence works, but it needs more calls, more references and more attention to how the founders communicate and handle disagreement. Cultural differences in negotiation and reporting are real.
5. How will I get out? Check who the likely buyers are, where they are located and whether local rules affect a sale or a transfer of the money. Make sure the intellectual property sits in the company you invest in.

A practical way in

• Co-invest with people who know the market. A local angel network or a syndicate shares diligence and local knowledge. I wrote more about this in Syndicated Angel Investing.
• Use a checklist. The same investability questions apply abroad; see What Makes a Startup Investable?
• Only invest what you can afford to lose, spread over several companies, and keep reserves for follow-on rounds.
• Bring advisors in early: a lawyer and a tax adviser licensed in the relevant countries.

Your turn: have you invested, or raised money, across a border? What would you have wanted to know in advance? Tell us in the comments.

Reference
Wiltbank, R. and Boeker, W. (2007) Returns to Angel Investors in Groups. Ewing Marion Kauffman Foundation and Angel Capital Education Foundation.